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Thursday, January 08, 2009

SATYAM INDIA'S ENRON

HYDERABAD/MUMBAI - 8 JAN 2009: The irony lies in the name - Satyam, meaning truth. The real truth is that Ramalinga Raju, the politically-connected, promoter-chairman of Hyderabad-headquartered Satyam Computers, was lying for years to shareholders, employees and the world at large, building up to India's largest-ever corporate fraud of over Rs 7,000 crore.

The country's fourth largest IT company - after TCS, Infosys and Wipro and ahead of HCL - was for several years cooking its books by inflating revenues and profits, thus boosting its cash and bank balances; showing interest income where none existed; understating liability; and overstating debtors' position (money due to it).

The 54-year-old US MBA Raju's letter of guilt and resignation to the Satyam board and Sebi on Wednesday morning sledge-hammered India Inc, dumbfounded regulators, pummelled the company's stock, knocked the bottom out of the market, and cast a long shadow over industry in general and the IT sector in particular.

It also raised disconcerting questions about corporate governance, the role of auditors (in this case Pricewaterhouse Coopers) and independent directors (Satyam has its share of luminaries such as ISB dean M Rammohan Rao, Krishna Palepu of Harvard Business School who resigned and former union cabinet secretary T R Prasad).

This wasn't some small fly-by-night operator that had been caught out. Satyam is listed on the New York Stock Exchange, boasts 185 Fortune 500 companies on its client list and employs 53,000 people - that's equal to the combined number of employees of Tata Steel and Tata Motors (30,000 and 23,000 respectively).

Within hours of the Satyam scandal hitting the headlines, its employees had flooded job portals across the world wide web in search of alternate employment. Consider that the Rs 7000-plus crore hole in Satyam's books is way more than the company's entire salary bill of Rs 5,040 crore last year. Worse still, it's running really low on cash, and once-potential suitors have turned wary - they don't know what lies beneath.

As for Satyam's shareholders, the stock had gone into freefall before they could even make a decent exit. By the end of the day, large-scale selling by foreign institutional investors, among others, had driven the stock down by almost 78% to just a shade below Rs 40 from Tuesday's close of a little over Rs 179, wiping out Rs 9,376 crore of investor wealth in the space of a day. Compared to its closing price of Rs 225 on December 15, the stock is down more than 82%.

The day after, Raju announced his ill-fated plan to shell out $1.6 billion to acquire his sons' companies, Maytas Properties and Maytas Infra. It created such a furore that Raju was forced to backtrack. But what was widely seen as a move by Raju to bail out his sons was actually aimed at covering Satyam's tracks through fictitious cash transfers (details inside).

The timing of what is being called `India's Enron' could not have come at a worse time - just when the stock market was showing signs of responding positively to the Centre and RBI's moves to stimulate the economy through interest rate cuts, duty reductions and accelerated government spending. A day after the sensex crossed the 10,000-mark, it plunged by 749 points, wiping out almost Rs 1.3 lakh crore (or trillion) of market capitalization.

There's intense speculation as to what finally triggered Raju's confession of wrongdoing. It's clearly more than coincidence that it came hot on the heels of investment banker DSP Merrill Lynch's letter to the company on Tuesday evening (followed by another to Sebi this morning) terminating its 10-day-old agreement with Satyam to advise it on strategic options because of ``material accounting irregularities''. But the beginning of the end came when furious investors forced Raju to reverse his decision to acquire the two group companies (Maytas Properties and Maytas Infra), robbing him of his last chance to wriggle out of a very tight corner.

By the end of Wednesday, the knives were out with Sebi, the stock exchanges, the Indian Chartered Accountants Institute, the department of company affairs and institutional investors announcing/considering a flurry of probes/actions against Raju, Satyam and its auditors. NYSE has halted trading in Satyam ADRs (American Depository Receipts).

Fearing violence, the Hyderabad police threw a cordon around Satyam's offices and Raju's residence in upmarket Jubilee Hills even as the company's wholetime director-now-interim CEO Ram Mynampati, after expressing "shock", swung into damage control mode.